2012 Black Swans

Now that 2012 has descended upon us, many are embarking on strategic business planning. Uncertainty and volatility will be key words in any planning document for the New Year. Therefore, financial scenario planning, with the possibility of five to 10 different scenarios, needs to be completed and monitored throughout the year. When determining which scenarios to plan for, one element that will be critical is anticipating unusual or black swan events that can result in the business playbook being turned upside down. What are some of the possible black swan events that could create unusual scenarios?

Conflicts in Iran and the Middle East should be closely watched. Approximately 20% of world oil production comes from that region. Up to 30% of oil production travels through the Strait of Hormuz near Iran. Any blockade or military conflict between nations in that region could result in $200/barrel oil (NYMEX), which could represent $6/gal. gasoline and diesel fuel prices. With nearly 80% of farm and ranch expenses connected to the commodity of oil, if the preceding events came to fruition, agricultural business financials could be in turmoil within six weeks. This event could ripple through the world economy, increasing the possibility of a deep recession.

Another potential black swan event could happen in the Euro sector. Economic failures of European nations or banks could be devastating, not only to the European and U.S. economies, but economies of the emerging BRICS nations, particularly China. The grain and row crop industries that are aligned with China and the BRICS nations could see devastating impacts on commodity prices if a black swan event occurs in the Euro sector.

An additional black swan could be military conflict, social unrest, political uncertainty or domestic or foreign-based terrorist attacks. Any of these events, separate or interconnected, could result in placing the fragile economies in the developed world into recession.

A natural disaster – similar to the Japanese situation – that impacts the West Coast or population centers around the world would be another threat. This could disrupt consumer demand and confidence, resulting in a negative effect on the agricultural economy.

Finally, the loss of confidence in the U.S. economy and its leaders’ ability to resolve long-term economic challenges is a potential black swan. If this occurs, be prepared for rapid ascension of interest rates as a result of loss of confidence in funding the U.S. government debt. This black swan is inevitable if tough economic reforms are not instituted.

That is enough of the gloom and doom! Preparing for these potential business risks should involve maintaining disciplined growth, debt management, and strong cash reserves. While these events could have negative consequences, any good business model will use the black swan events to position for the future and the next opportunity.

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]